The California Global Warming Solutions Act of 2006

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In 2006, California became the first state in the U.S. to create a legally binding program to limit greenhouse gas emissions. Also known as AB (Assembly Bill) 32, the Act left substantial discretion to the California Air Resources Board (CARB), the California Energy Commission (CEC), the Public Utilities Commission (CEC), and other state agencies.

One key issue to be decided by these agencies is whether to implement a market system for reducing emissions, such as a "cap and trade" program. In a cap and trade, the government sets a cap on emissions during a specified time period (such as a calendar year), and issues a new commodity called carbon permits, or "allowances," which give regulated entities (which, depending on implementation, would likely be companies, but could also be public entities or even individuals) the right to emit a specified amount (such as a ton) of carbon dioxide emissions (or their equivalent, as specified by the official published IPCC estimates of Global Warming Potential for the other greenhouse gases).

In the likely case that there is a cap and trade, the electricity sector would probably be the first industry to be subject to a rigorous cap. In this case, many companies stand to gain or lose depending on how the allowances are allocated. The allowances can be publicly auctioned, "grandfathered" on the basis of historical emissions, distributed according to some other criteria, or any combination of these methods. On June 22, the CEC held one of the first public meetings on this issue, which will surely be one of the most controversial aspects of AB 32, as at expected carbon prices, billions of dollars are at stake.

Who Wins

It depends on how allowances are distributed. If allowances are distributed on the basis of historical emissions, there would not likely be any initial serious financial impact on regulated utilities. However, if the allowances are distributed on the basis of some other factor, like demographics or total electricity sales, then Pacific Gas & Electric (PCG), and other utilities which already have relatively low carbon intensities (or emissions per unit of electricity output) -- stand to gain from the sales of excess allowances. (Unless the PUC forced PG&E to pass these savings on to its customers).

Who Loses

In contrast, in this case, or in the case of an auction, utilities like Southern California Edison (SCEDM) and San Diego Gas & Electric, which have much higher current emissions intensities, could lose substantially by being forced to buy expensive allowances from competitors or the state -- unless, again, the PUC allowed these costs to all be passed on to customers. However, even in that case, consumption of electricity would likely fall, making it more difficult for the utilities to recover their desired returns on existing assets. Furthermore, some of these assets include heavily polluting coal plants that may be forced to retire early (in contrast to PG&E, which owns little or no coal).

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